Investing Basics: What Are Stocks?

Beginning to invest is kind of like cultivating a new garden. At first, the soil is bare, and the idea of nurturing a vibrant, abundant landscape can seem daunting and complex. A few missteps, and you may spoil all the hard work that went into digging and planting. That's why it's essential to master the fundamentals and focus on reducing risk. 

But while there will be both sunny stretches and stormy days, anyone applying consistent effort can learn to cultivate a thriving garden (or portfolio). Let's start by learning about one of the most common seeds investors like to plant: stocks. 

A stock represents a small piece, or "share," of a publicly traded company. When investors buy a stock, they become a part-owner of that company and hold a claim to a fraction of its earnings and assets. When a company's value increases or declines, the price of its stock typically follows suit. 

Companies sell stock to investors for a variety of reasons. Sometimes they're looking to raise money to expand their operations or pay down debt. Other times, they're attempting to boost their public profile, enhance their credibility, or attract talent. 

Stocks are generally bought and sold electronically on stock exchanges like the New York Stock Exchange (NYSE), the National Association of Securities Dealers Automated Quotations (Nasdaq), or the London Stock Exchange (LSE).

Stocks, also known as equities, are one of the most common building blocks investors use to grow their wealth gradually. There are two main ways an investor can potentially make money by holding stocks: appreciation and dividends. 

Investors can profit if they decide to sell their shares after the price of a stock they own moves higher. For example, if an investor purchases 10 shares of a company's stock at $10 per share and the price rises to $15 after the company's earnings increase, the investor could then sell their stock for a $50 profit, or $5 per share, not including commissions or fees. 

Stock prices can rise if a company grows its revenues or earnings, or if its business becomes more highly valued by the broader market. However, there is no guaranteed method for predicting stock price movements. 

Investors can also profit from their stock holdings through dividend payments. Some companies pay dividends as a way of sharing earnings with stockholders and increasing the perceived value of holding their shares. Dividends are typically periodic cash payments, but companies can also distribute them as stock. 

For example, if an investor purchases 10 shares of a company at $10 per share (10 x $10 = $100), and that company pays a 5% cash dividend, the investor will receive $5 in cash each year simply for owning the shares. The money is generally split into quarterly or monthly payments. 

Companies can also issue one-time payments, called special dividends, in either cash or stock. 

However, dividend payments are not guaranteed. Companies can increase, decrease, or cut their dividends entirely. These payments are subject to change based on factors like a company's financial health, business needs, and broader economic conditions. 

Investing in stocks comes with significant risks. If companies underperform, or miss expectations, or cannot adapt to new trends or rising competition, their stock prices can drop significantly and never recover. 

Stocks can also be highly volatile, meaning their share prices can swing wildly due to company-specific developments or changes in economic conditions. Because of this, stocks are typically seen as riskier investments than assets with set rates like bonds or CDs. 

Creating and committing to an investment plan is a great way to mitigate risk. This approach can help investors establish a suitable asset allocation, avoid emotion-driven decisions, and adhere to a disciplined approach that aligns with their financial goals. 

Diversifying stock holdings may also help mitigate risk. By investing in companies of various types and sizes and putting money into other assets—like bonds or real estate—investors may be able to reduce the impact of one or a few poor-performing stocks on their portfolios. 

Maintaining adequate savings is another way to potentially reduce the risk of owning stocks. A savings cushion can protect investors from being forced to sell their holdings and lock in losses during market slumps or due to an emergency expense or job loss. 

Investors might also consider implementing active trading strategies to generate income or hedge their portfolios against potential market downturns. 

Understanding how stocks are classified is essential for investors, especially when the goal is to construct a balanced, diversified portfolio. 

Stocks are primarily grouped into common and preferred shares. Preferred shares give holders priority over common stockholders for dividend payments and asset recovery but rarely have voting rights. When a company becomes insolvent and faces liquidation, asset recovery is the process by which investors and creditors receive payments from the company's remaining assets. Common stocks, on the other hand, always come with voting rights but have a lower claim to assets in recovery and dividends. 

Another common way to categorize stocks is by market capitalization, which is a measure of company size. As of September 2025, this is how stocks are segmented by market cap:  

• Mega-cap stocks have a market cap above $200 billion.
• Large-cap stocks have a market cap between $10 billion and $200 billion.
• Mid-cap stocks have a market cap between $2 billion and $10 billion.
• Small-cap stocks have a market cap between $300 million and $2 billion. 

There are also penny stocks, which don't have a specific market-cap range. A stock is considered a penny stock if it has a low market cap and trades under $5 per share on over-the-counter (OTC) markets, rather than a major stock exchange. 

Stocks are also sorted by where the company has its headquarters. Domestic stocks have their company's headquarters within an investor's home country. Developed market stocks have corporate headquarters within developed nations like France, the UK, or Japan. Emerging-market stocks are based in developing nations like Thailand, Brazil, or India. 

Company sectors are also used to segment stocks. There are 11 major market sectors: financials, industrials, consumer discretionary, consumer staples, health care, real estate, information technology, energy, utilities, materials, and communication services. 

Finally, stocks can be categorized by defining characteristics, the most common of which are growth, value, and dividends. 

• Dividend stocks pay a dividend, providing shareholders with income.
• Growth stocks are shares of companies that are expected to grow their sales and profits faster than the broader market.
• Value stocks are shares viewed as inexpensive relative to their peers and their fundamentals—like earnings, sales, or assets. 

Learning how to pick stocks can be intimidating. Thankfully, there are tools to help investors look beneath the surface of a stock and potentially separate winners from losers. Fundamental and technical analysis are two of the most common analysis methods investors use.  

Investors can look at the fundamental characteristics of companies' financial statements to help assess the long-term potential and risks that a company may face. Here's a non-exhaustive list of fundamental analysis criteria to consider: 

• Financial metrics. Among the most important characteristics to analyze in any potential stock investment are a company's financial metrics, such as revenues, net income, debt, and profit margins. 
   
• Valuations metrics. Metrics like price-to-earnings, price-to-sales, and price-to-book ratios can help investors gauge the relative value of a company compared to its peers.
   
• Industry trends. Companies in rapidly growing industries are often viewed as more valuable than those in shrinking or stable industries. 
   
• Dividend history. Some investors focus on finding companies with a history of consistently paying and raising their dividends. 
   
• Management team quality. The experience and expertise of a company's management team can affect company value. 
   
• Competitive advantage. Companies that can provide unique, difficult-to-replicate value propositions are often seen as more valuable by investors. Berkshire Hathaway's Warren Buffett famously described this as companies with protective "moats" around their businesses' proverbial castles in a 1995 shareholder meeting. 
   
• Economic conditions. Factors like economic growth, level of interest rates, inflation rate, health of the labor market, and government policies also play into the fundamental value of stocks. 

Another approach investors use to evaluate stocks is technical analysis, which involves studying price charts and trading activity in hopes that past trading patterns can offer clues about future price movements. 

For example, if a stock has bounced higher several times after falling to a specific price—known as a "support level"—investors may see that level as a floor where the stock often stabilizes and then rises again. Conversely, if a stock struggles to move above a certain price—called a "resistance level"—investors may view that level as a ceiling the stock will struggle to break through. 

Investors using technical analysis may also look at things like moving averages, trading volume, or momentum indicators. 

Technical analysis comes with risks and can't guarantee outcomes but can be used as a tool to better understand market behavior and inform the timing of buy or sell decisions. 

Investors can buy stocks in various ways depending on their goals. Most investors purchase stocks through a brokerage account or a retirement account like an IRA or 401(k). But some companies offer direct stock purchase plans (DSPPs) that let investors buy shares without an intermediary. 

Investors can also gain exposure to stocks in brokerage or retirement accounts through exchange-traded funds (ETFs) and mutual funds, which track baskets of stocks based on specific characteristics. Each stock-buying method has its own advantages in terms of cost and convenience. 

Just like learning to cultivate a garden, becoming a knowledgeable investor takes time and consistent effort. Each new concept an investor learns adds to their toolkit, building confidence and skill over time. 

Learning about stocks is just the beginning of a lifelong investing journey, like planting the first seed in a new garden. But consistent effort can eventually help anyone cultivate a portfolio that may bear real fruit.